Statistical Data.

BEFORE AND AFTER 1969

 The Reserve Bank of India’s Special Edition of the Report on Currency and Finance contains a comprehensive account of
the evolution of banking in post-Independence India, which inherited a system where small private banks proliferated —
56 per cent of all bank deposits in 1947 lay with the 81 scheduled and 557 non-scheduled private banks.

 These private banks were lopsidedly concentrated in the provinces of Madras, West Bengal and Bombay. Between 1947
and 1955 there were 361 instances of bank failures, with many depositors losing their life savings along with their faith in
the banking system.

 It was in this backdrop that new laws of banking regulation, capital adequacy, licensing and inspection were enacted
followed by a phase of liquidation and amalgamation, which brought down the number of scheduled banks to 71 and
non-scheduled banks to 20, by 1967

 Despite some growth in deposit mobilisation, several problems persisted. The private owners of the banks were more
interested in cornering the finance mobilised through deposits rather than running the banks on sound commercial
principles. There was a gradual erosion in the capital base of banks, with the ratio of paid-up capital and reserves to
deposits declining from 9.7 per cent in 1951 to 2.2 per cent in 1969.

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Statistical Data.
 From 4,061 in 1952, the total number of bank branches increased very slowly to 8262 in 1969, with the share of rural
branches increasing from 13 per cent to 17 per cent. Between 1951 and 1967, the share of agriculture in total credit
remained stagnant at around 2.2 per cent only.

 In 1969, only the five cities of Bombay, Calcutta, Delhi, Madras and Ahmedabad accounted for 44 per cent of all bank
deposits and 60 per cent of total bank credit in the country. It had become clear by the the end-1960s that without a
structural break in the banking system, the goals of development planning would get undermined.

 The efficacy of bank nationalisation could be seen in the increase in bank branches brought about by the 22 public sector
banks in just five years. Half of the 10,543 new bank branches opened between 1969 and 1975 were in the rural areas,
increasing the share of rural branches from 17 per cent to 36 per cent. By 1990, total bank branches numbered 59,752,
with over 58 per cent share of rural branches.

 The share of agriculture in total credit went up from 2.2 per cent in 1967 to over 9 per cent in 1975; it stood at 15.8 per
cent in 1989 thanks to the priority sector lending norms.

 As the state policies shifting towards liberalisation and privatisation in the last three decades and the entry of new private
sector banks, the dominance of the public sector banks (PSBs) has been on a decline. The share of PSBs in the total assets
of the scheduled commercial banks, which was over 80 per cent in 1997-98 declined to around 70 per cent by 2007-08
and further to below 66 per cent in 2017-18.

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 Public ownership in the PSBs has also been diluted over time, with four out of the 19 currently operating PSBs having
government equity of less than 75 per cent with that of largest PSB, the SBI, at below 58 per cent. Branch expansion in the
rural areas has also suffered with the share of total rural branches falling from 50 per cent in 2000 to 37 per cent in 2010
and further to 36 per cent in 2018.

 In the immediate aftermath of the global financial crisis in 2007-08, which had exposed the dubious financial practices of
the private multinational banks, both deposit mobilisation and credit flow of the public sector banks in India had
witnessed a phase of higher growth compared to the private sector banks.

 The previous UPA government and the RBI were also responsible for encouraging reckless lending practices. The piling up
of NPAs, wilful defaults and bank frauds have continued under the Modi regime. NPA reduction in the very recent period
has happened through ₹4 trillion plus debt write-offs effected between 2014-15 and 2017-18, which have inflicted record
net losses on the PSBs, despite posting healthy operating profits. Bank frauds have also skyrocketed with many legacy
NPAs now being classified as frauds.

 In this context, successive doses of capital infusion by the government have not been able to improve the capital ratios of
the PSBs significantly. PSB recapitalisation under the present dispensation has been more of a taxpayer funded bailout of
the loan delinquent corporates and fraudsters.

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 The IBC process so far has not been very effective in yielding timely NPA recovery. The average recovery rate is currently
43 per cent, which implies 57 per cent haircut for the banks. Unless this improves significantly, and tough punitive action
against bank frauds and wilful defaults are initiated transparently, PSB losses will continue to mount.
 PSB mergers, disinvestment or the FRDI Bill are non-solutions, which will further weaken the PSBs.
 What is required is a major course-correction.

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